Editor’s Note: This is an updated version of a story originally on November 2, 2022.
At the last policy meeting of the year The Federal Reserve raised interest rates for the seventh time on Wednesday Consistently in the range of 4.25% to 4.5%. This is the highest in 15 years.
In an ongoing bid to tame decades of high inflation, the central bank is likely to continue raising rates higher next year, albeit at a modest pace.
That means higher borrowing costs for consumers. But it does mean that your savings can start earning less money after years of low interest.
“Credit card rates are at an all-time high and rising. Car loan rates are at an 11-year high. Home equity lines of credit have a 15-year maximum. And online savings account and CD yields haven’t been this high since 2008,” said Bankrate financial analyst Greg McBride.
The good news: There are ways to keep your money in order to take advantage of price increases.
If you’re stashing cash at big banks that pay almost no interest for savings accounts and certificates of deposit, don’t expect that to change much, McBride said.
Thanks to the lower prices of the big players, the national average savings rate is still about right. 0.19%, up from 0.06% in January, according to Bankrate’s December 7 weekly survey of large institutions.
But all those Fed rate increases they are. It’s starting to have a more significant impact on online banks and credit unions, McBride said. They’re offering very high rates — currently over 3.75 percent — and they’re increasing as benchmark rates rise.
As for certificates of deposit, there is a significant increase in response. The average one-year CD rate was 1.20% as of November 22, up from 0.14% earlier in the year. But high-yield one-year CDs now offer up to 4.5%.
So shop around. If you do switch to an online bank or credit union, however, be sure to choose only those that are federally insured.
Given today’s high inflation, Series I savings bonds can be attractive because they are designed to protect your money’s purchasing power. They are currently paying 6.89%.
But that rate only works for six months and only if you buy I bonds at the end of April 2023, after which the rate is scheduled to adjust. If inflation falls, the price on the I bond will also fall.
There are some restrictions: You can only invest $10,000 per year. You cannot redeem within the first year. And if you withdraw within two to five years, you’ll lose the last three months of interest.
“In other words, I bonds are not a substitute for your savings account,” McBride said.
However, if you don’t need to touch it for at least five years, you’ll keep your $10,000 in purchasing power, and that’s okay. They can also be especially useful for people who plan to retire within the next 5 to 10 years because they serve as a safe annuity investment that can be used if necessary during the first few years of retirement.
As the overnight bank lending rate — also known as the fed funds rate — rises, so do the various loan amounts that banks offer to their customers.
So you can expect to see a hike in the value of your credit card within a few statements.
The average credit card rate hit an all-time high of 19.40% as of Dec. 7, up from 16.3% at the start of the year, according to Bankrate. Some retail store credit cards carry fees of up to 30%.
“[Interest rate hikes] Michelle Ranieri, vice president of U.S. research and consulting at TransUnion, said it will have a significant impact on consumers who don’t pay off their credit card balances in full.
Top tip: If you carry balances on your credit cards – which typically have high variable interest rates – consider transferring to a zero-rate balance card that closes between 12 and 21 months at a zero rate.
“That will stop you [future] Increase rates, and give you a clear runway to pay off your debt once and for all,” McBride said. “Less debt and more savings will allow you to raise interest rates in better weather, and that’s especially important if the economy takes a nosedive.”
Be sure to find out what, if any, fees you have to pay (eg, account transfer fee or annual fee) and what the penalties are if you make a late payment or miss a zero-rate payment. time. The best strategy is to always pay off the outstanding balance as much as possible – on time each month – before the zero rate period ends. Otherwise, any balance will be subject to a new interest rate higher than what you had before if rates continue to rise.
If you haven’t switched to a zero-rate balance card, another option might be to get a relatively low fixed-rate personal loan. Average personal loan rates for people with good credit scores range from 10.3% to 12.5%, according to Bankrate. The best rate you can get depends on your income, credit score, and debt-to-income ratio. The bank’s advice: Ask a few lenders for quotes before filling out a loan application to get the best deal.
Over the past year, loan rates have been rising, jumping more than three percentage points.
The 30-year fixed-rate mortgage averaged 6.33% in the week ending Dec. 9, according to Freddie Mac. This is more than double from a year ago.
“After registering above 7%, mortgage rates have lagged slightly but not enough to impact buyer affordability. Year-on-year increases in mortgage rates still rob a third of potential homebuyers of their purchasing power.
Moreover, the mortgage rate may increase even more.
So if you’re close to buying or refinancing a home, close on the lowest fixed rate available to you as soon as possible.
That said, “don’t get into a big purchase that doesn’t suit you because interest rates can go up.” up Rushing into a big-ticket purchase like a house or car is a recipe for trouble, even if it does for future interest rates, according to Lassie Rogers, a Texas-based financial planner.
If you already own a variable home equity line of credit and use part of it for a home improvement project, McBride recommends asking your lender if it’s possible to adjust the amount on your existing balance. Fixed rate home loan.
If that’s not possible, consider working with another lender to pay off the balance by taking out Helloc at a lower promotional rate, McBride suggests.
Market returns are likely to be better next year as inflation is likely to peak, said Yung-Yuma, chief investment strategist at BMO Wealth Management. “The perspective of equity and fixed income returns has improved, and a balanced approach [in your portfolio] It makes sense.”
This doesn’t mean markets won’t remain locked in the near term. But, he said, “a soft landing for the economy is not only possible, but possible.”
Any money you have in the next six to 12 months can go into the equity and fixed income markets at regular intervals, he said.
MA has outperformed value stocks, especially small caps, this year. “We expect this outstanding performance to continue for several years to come,” he said.
As for real estate, he said, “Very high interest and mortgage rates are a challenge…and that headwind could last for a few more quarters or so.”
Commodities fell in value. “But they are still a good hedge against uncertainty in energy markets,” he said.
Broadly speaking, however, it suggests making sure your overall portfolio is diversified across stocks. The idea is to hedge your bets, because some places will come out ahead, but not all.
If you are thinking of investing Consider a company’s pricing power and how consistent demand can be for a particular stock, says certified financial planner Doug Flynn, co-founder of Flynn Zito Capital Management.
The more bonds you own, the more likely the prices on your bonds will fall into a rising price environment. But if you are in the market to buy bonds Especially if you buy short-term bonds, meaning one to three years, you can benefit from the trend. It’s because. Relative to long-term bonds, their prices fell, and their yields rose even more. Typically, short-term and long-term bonds move together.
“There is a very good chance Very fragmented short-term bonds,” Flynn said.
“For those in higher income tax brackets, the same opportunity exists in tax-free municipal bonds.”
Muni rates have dropped significantly and yields have generally increased as they begin to improve, and many states are in better financial shape than before the pandemic, Flynn noted.
Ma recommends short-term corporate bonds or short-term agency or treasury securities.
Other assets that can do well are so-called floating rate instruments from companies that need to raise money, Flynn said. The floating rate is tied to a short-term benchmark rate, such as the fed funds rate, so it increases the longer the Fed increases.
But if you’re not a bond expert, you’re better off investing in a specialized fund to take advantage of the high-rise environment through floating rate instruments and other bond income strategies. Flynn recommends looking for a systematic income or variable income mutual fund or ETF that holds various types of bonds.
“I haven’t seen this many choices in 401(k)s,” he said. But you can always ask your 401(k) provider to include the option in your employer’s plan.